Global Growth and Income Distribution: Are China and India Reshaping the World? Maurizio Bussolo, Rafael E. De Hoyos, Denis Medvedev and Dominique van der Mensbrugghe The World Bank Paper prepared for the WIDER project meeting on “Southern Engines of Growth” January 2007, Beijing, China

Motivation 1.Shift of global production towards developing countries Basically explained by China and India 2.Global distribution of income is changing Between 1990 and 2005  450 million pulled out of poverty Increase in the “global middle class”

China and India are Reallocating World Output

Hypotheses and Objectives If the present pattern continues in the next 25 years: –How will the world’s GDP be affected by growth attainments in China and India? –How will the global income distribution and hence the size of the global middle class be change as a consequence of future growth in China and India? Objectives: Analyze, in an ax-ante fashion, the effects that economic expansion in China and India will have on global growth and the global middle class

Outline Methodology –LINKAGE (Global CGE model) –GIDD (model for Global Income Distribution Dynamics) Results for global growth Results for global income distribution Conclusions

Methodology: GIDD

Results: Global Growth

Sectoral Reallocation: Shift into services is more pronounced in China and India

Skill premiums are likely to rise across the developing world

Per Capita Incomes converge, but not for all Index: High-income=100 in each year Note: Ratio of PPP-adjusted per capita incomes relative to high-income average. PPP is fixed at base year (2001) level. Source: World Bank simulations with Linkage model.

Methodology: GIDD

Results: Global Distribution The between-countries inequality component decreases, explained, to a great extent by the catching up of China and India

The Emergence of a Global Middle Class Definition: Individuals whose income is between the per-capita income of Brazil and Italy, annual (2000 PPP) US$3,914 and US$16,746, respectively Increase in the global middle class –2000 = 460 million members –2030 = 1.2 billion members How much is due to China and India? –½ of the total change in the global middle class (GMC) is explained by China

The Importance of China and India in the Global Middle Class

Growth in China and India determines the performance of the GMC Within-country distribution also matters

Conclusions